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Policy Implications of Using Audits to Detect Bank Insolvencies

Author Info

  • Jaime Hurtubia
  • Claudio Sardoni

Abstract

We present a model where a regulator has to decide how to tackle the potential insolvency of a bank in a context of asymmetric information. We show that, when it can audit the bank, the regulator is unlikely to choose a policy of bailout to induce the bank to reveal its insolvency. We show that, in some circumstances, the regulator can induce the bank to reveal its insolvency by threatening to randomize its decision to nationalize the bank.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 651.

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Date of creation: Dec 2011
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Handle: RePEc:chb:bcchwp:651
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  1. Osano, Hiroshi, 2002. "Managerial compensation contract and bank bailout policy," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 25-49, January.
  2. Haizhou Huang & Charles Goodhart, 1999. "A Simple Model of an International Lender of Last Resort," FMG Discussion Papers dp336, Financial Markets Group.
  3. Haizhou Huang & C. A. E. Goodhart, 1999. "A Model of the Lender of Last Resort," IMF Working Papers 99/39, International Monetary Fund.
  4. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Mitchell, Janet, 1998. "Strategic Creditor Passivity, Regulation and Bank Bailouts," CEPR Discussion Papers 1780, C.E.P.R. Discussion Papers.
  6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  7. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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